It has been about a month since the last earnings report for Webster Financial (WBS - Free Report) . Shares have added about 8.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Webster Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Webster Financial Beats on Q3 Earnings on High Revenues
Webster Financial delivered a positive earnings surprise of 1% in third-quarter 2019. Adjusted earnings of $1.01 per share surpassed the Zacks Consensus Estimate of $1. Also, the reported figure increased 3.1% from the prior-year quarter.
Results were driven by improvement in revenues as well as growth in loan and deposit balances. Also, capital ratios were impressive. However, higher non-interest expenses and provision for loan losses, along with contracting NIM, acted as major headwinds.
Excluding non-recurring items, the company reported earnings applicable to common shareholders of $91.4 million, down from the prior-year quarter’s $97.5 million.
Revenue Growth Offsets Higher Expenses, Loans & Deposits Increase
Webster Financial’s total revenues increased 2.6% year over year to $310.5 million. However, the top line missed the Zacks Consensus Estimate of $314.1 million.
Net interest income grew 4.4% year over year to $240.5 million. Moreover, NIM contracted 12 basis points (bps) to 3.49%.
Non-interest income was $69.9 million, down 3.3% year over year. The fall mainly resulted from decline in loan and lease related fees.
Non-interest expenses of $179.9 million inched up 0.6% from the year-ago quarter. This upswing mainly resulted from rise in all components except deposit insurance and occupancy costs.
Efficiency ratio (on a non-GAAP basis) came in at 56.60% compared with 57.41% as of Sep 30, 2018. A lower ratio indicates improved profitability.
The company’s total loans and leases as of Sep 30, 2019 were $19.6 billion, up 1.5% sequentially. Also, total deposits increased 3% from the previous quarter to $23.3 billion.
Credit Quality Deteriorates
Total non-performing assets were $166.7 million as of Sep 30, 2019, up 5.5% from the year-ago quarter. In addition, the ratio of net charge-offs to annualized average loans came in at 0.28%, up 15 bps year over year. Also, the provision for loan and lease losses increased 7.6% to $11.3 million as of Sep 30, 2019.
However, allowance for loan losses represented 1.07% of total loans as of Sep 30, 2019, down 9 bps from Sep 30, 2018.
Improved Capital Ratios, Decline in Profitability Ratios
As of Sep 30, 2019, Tier 1 risk-based capital ratio was 12.29% compared with 11.96% as of Sep 30, 2018. Additionally, total risk-based capital ratio came in at 13.65% compared with the prior-year quarter’s 13.44%. Tangible common equity ratio was 8.34%, up from 7.86% as of Sep 30, 2018.
Return on average assets was 1.27% in the reported quarter compared with the year-ago quarter’s 1.47%. As of Sep 30, 2019, return on average common stockholders' equity came in at 12.36%, down from 14.74% as of Sep 30, 2018.
Management expects average loans to be up around 2% on a sequential basis, led by commercial and residential loans.
The average earnings assets are expected to grow about 2.5% sequentially.
On the interest rate cut by another 25 bps, NIM is expected to shrink 12-15 bps sequentially. This projected figure also includes a contraction of 3 bps, due to balance-sheet repositioning in the third quarter. Thus, NII is anticipated to be down $3-$5 million. Nevertheless, NII is likely to improve post fourth quarter, though the company expects another rate cut in March.
Notably, if interest rates remained unchanged, NIM is likely to contract 8-10 bps and the NII will be at par with that of the third quarter’s.
Non-interest income will likely be up $1-$3 million.
Management expects provision for loan and lease losses to increase in the fourth quarter, considering loan growth, portfolio mix and asset quality.
Efficiency ratio is expected to be below 57%.
Management expects the tax rate on a non-FTE basis to be around 21%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
Currently, Webster Financial has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Webster Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.